More Businesses Turn to 'Flexible' Office Space

NEW YORK ( TheStreet) -- Small-business owners are constantly looking for ways to rein in expenses while increasing productivity, especially as a bad economy continues to hurt their bottom line, and location looms large in the search.

The result is a soft real estate market with eager-to-please landlords, and as if telecommuting weren't enough to complicate the situation, there's yet another trend as bad for landlords as it good for small business: the so-called flexible work space.

"There's a paradigm shift in our culture," says Tom Camplese, COO of Intelligent Office, which offers flexible workplace services. "The corporate culture was one of control -- every employee needs to be in the office at their desk at 8 a.m. and needs to be there until 5 p.m. Well, that paradigm has shifted from one of control to efficiency and productivity."

Flexible spaces offer a professional business address, meeting rooms, video conferencing and even administrative staff to help clients, among other things.

The option is cost efficient and appealing to small-business owners in large part because it relieves employers of administrative tasks such as fixing broken desk equipment or IT problems "that really doesn't help the business grow at all." Camplese says. "We take care of all of those things for them."

Regus, with 450 locations in the U.S., says it is the world's largest provider of flexible workplace solutions.

The model saves about 60% over a traditional office lease, providers say, even while offering flexibility and low risk depending how a business works out; quality in the physical setting of the office; and improved productivity from being in a professional setting.

"Some people don't need an office in the city, but they need an address. They want to have a presence, which is very important for the image for their business," says Guillermo Rotman, CEO of Regus Americas. "Some people cannot afford an office on Park Avenue, but they can afford a virtual office."

"The key to our world is flexibility," Rotman says. "A client, especially a small client, may sign for six months. What happens is that they renew for another six months and end up staying with us for years. They may change their requirements. One time they may need six offices, but over a growth period they may need 10. In a recessionary environment they may go back to five or four."

"People don't need more office space or more offices if there aren't jobs being created," he says.

According to the NAR's most recent commercial real estate outlook, office vacancy rates are expected to decline to 15.3% by the second quarter of 2012 from the current 16.3% -- although Armstrong says that's still high, since "you want to have something in the 10% range or better."

Honolulu and New York City have the lowest vacancy rates, each below 9%, and that makes for high rents in those cities.

Elsewhere, as recessionary woes, telecommuting technology, societal trends and green pressures accumulate, landlords must use concessions to attract and retain tenants, according to the Society of Industrial and Office Realtors, a trade organization. Office and industrial rents continue to be soft, it says.

But there will always be a need for traditional office space, Armstrong says, and he's skeptical that flexible work space is cutting demand significantly.

Virtual office space "is growing to a degree, but I don't think it impacts the traditional office market too much," Armstrong says. "We've got industries growing all the time, and as businesses grow they need more space."

"There are just certain aspects of productivity that are better served in a workplace environment," he says. "It's also quite a transition to embrace the virtual-office concept. Not everybody has done that."

For businesses wavering between the two models, one way to decide is to consider cost, credit and human capital needs, says Jeff Stibel, CEO of Dun & Bradstreet Credibility.

"Businesses are struggling right now and they're trying to make decisions both on how to save money and how to grow their business," Stibel says.

"Obviously, you can save money by moving to a virtual office, but are there drawbacks to it," Stibel says. "If your business starts to expand somewhat quickly, you can be limited in terms of that virtual space."

"Traditional office space is starting to get very affordable because there is an abundance of space out there, particularly in second-tier markets where a lot of these small businesses get started," Stibel says, naming Greensboro, N.C. and Short Hills, N.J., as examples.

When dealing with a traditional lease, Stibel says business owners should consider: